2) Capital Adjustment when there is no goodwill adjustment
A and B are partners in a firm showing profit equally.
Following is their Balance Sheet as on 31.3.2025:
Liabilities | ā¹ | Assets | ā¹
---------------------|---------|----------------------|---------
Creditors | 20,000 | Cash in hand | 7,000
Bills payable | 4,000 | Stock | 25,000
General Reserve | 6,000 | Buildings |
Capitals | | Debtors | 17,000
A | 80,000 | (-) Provision for Doubtful Debts | 1,500 | 15,500
B | 40,000 | Furniture | 14,500
| | Patents | 30,000
| | Plant & Machinery | 18,000
| 1,50,000| | 1,50,000
On 01.4.2025, C is admitted into partnership on the following terms:
a) C should bring ā¹ 25,000 as Capital
b) Stock is to be increased by 8%.
c) Provision for doubtful debts is increased to ā¹ 2,600.
d) Capital accounts of partners are to be adjusted in their new profit sharing ratio of 3:3:1 based on Shiva's Capital.
(Adjustments to be made in Cash).
Answer (2)
To solve this problem of capital adjustment in a partnership, we need to follow these steps:
Adjust Stock Value:
The stock is to be increased by 8%.
Current stock is ā¹25,000.
Increase = 8% of ā¹25,000 = 100 8 ā Ć 25 , 000 = 2 , 000 .
New stock value = ā¹25,000 + ā¹2,000 = ā¹27,000.
Adjust Provision for Doubtful Debts:
The provision for doubtful debts is to be increased to ā¹2,600.
Current provision is ā¹1,500.
Increase = ā¹2,600 - ā¹1,500 = ā¹1,100.
Calculate the Total Effect on Capital Accounts:
Adjust General Reserve: Total reserve of ā¹6,000 to be distributed equally between A and B since new partner C is not eligible for past reserves.
Distribution: 2 6 , 000 ā = 3 , 000 each to A and B.
Determine the New Capitals after Adjustments Based On Shiva's Capital (here, assume it refers to the new partner C's capital):
C brings ā¹25,000 as capital.
Profit-sharing ratio is given as 3:3:1 for A, B, and C.
Combine individual partner capitals and adjust as per the new ratio, ensuring they share the total capital according to the ratio 3:3:1.
Adjust Existing Capitals Without Goodwill:
Let's calculate total adjusted capital and adjust A, B based on C's capital of ā¹25,000.
Total required capital = ā¹25,000 (Cās capital) with A:B = 3:3, which implies A + B + Cās capital must maintain the ratio.
Adjusting the Capital and Cash:
Ensure cash adjustments are made appropriately to balance the excess or deficit in partners' capital to maintain new agreed ratio.
Depending on whether partners A or B have excess or deficit respectively, cash is either adjusted according to increases needed or reduced.
It is important to track every adjustment made to the balance sheet to ensure it remains balanced and accurately reflects the new partnership structure.
To adjust the partnership capital for A, B, and new partner C, we need to modify asset values like stock and provisions, distribute past reserves, and align partner capitals according to a new profit-sharing ratio. Cash adjustments will then be made to correct any imbalances in their respective capital accounts. These steps ensure a fair assessment of all partners' contributions and distributions in the partnership.
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